Recent News - C-Corp. vs. S-Corp.

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Sep 01

Hughes Media Law Group

C-Corp. vs. S-Corp.

Posted by Hughes Media Law Group

Business owners who opt for a corporate structure can choose to be a C-Corp. or a S-Corp. for IRS tax reporting purposes. Here is a quick rundown of the major differences.

C-Corp: Traditional corporation tax structure under which the entity pays its own taxes.

  • Taxation - A C-Corp. is subject to double taxation.
    • 1) The corporation itself pays taxes on net income; and
    • 2) proceeds are taxed again when distributed to shareholders.
  • A shareholder’s stock tax basis is not affected by the entity’s income or losses.
  • Much flexibility in selecting a fiscal tax year.   
  • Equity structure and Eligibility – A C-Corp. allows for any number of different equity structures and multiple classes of stock. E.g., preferred stock, phantom stock, and stock with different combinations of rights.

S-Corp: A corporation that has elected to be taxed as a pass-through entity (similar to partnerships) by filing Form 2553 with the IRS.

  • Taxation – The entity itself pays no income tax. Instead the income gets “passed-through” pro rata to shareholders who report it on their personal tax returns and pay the applicable tax amounts.
  • Accordingly, a shareholder’s stock tax basis is affected by the entity’s income or losses.  
  • Generally, must opt for a calendar fiscal tax year.
  • Equity structure and Eligibility – A S-Corp. faces many more equity structure restrictions.
    • Cannot have more than 100 shareholders.
    • Must have only one class of stock (although stock “classes” with different voting rights are allowed)
    • Cannot have corp., partnerships, LLCs, non-resident alien shareholders, or ineligible trusts as shareholders.

It is important to remember that all corporations are C-Corps. unless they make the S election noted above. 

These blog posts are made available by HMLG for educational purposes only and to give you a general understanding of the law. The information provided should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.